Hardly a day passes without mention in the industry press of the challenging, hyper-competitive business climate confronting both consumer products manufacturers and retailers alike. In response to the growing intensity of the competitive environment, an increasing number of retailers are seeking to improve their profitability through consumer products manufacturer funded tactics such as increased promotional programs, pricing concessions, and more favorable trade terms.
But, as we know, there is more to the story as many retailers are also placing additional focus on their own private label offerings – more often than not to the further detriment of consumer products (CP) manufacturers’ branded products.
The upshot – CP manufacturers continue to achieve limited revenue appreciation as volume and net price realization are suppressed under the escalating demands of their larger, more sophisticated customers with increased buying power and negotiating strength. While that is indeed the reality for an expanding number of CP manufacturers, the Street won’t be handing out any hall passes because times are getting tougher. Profitable top line growth remains requisite.
Given the immutability of the above, what combination of commercial strategies should CP manufacturers pursue to optimize drivers for value creation? Clearly that depends on a complex web of factors relative to one’s business model, growth objectives and customer/competitive landscape. My purpose is not to extol the virtues of stepping-up investment levels across the drivers of enduring brand differentiation – that’s a longer-term play – but instead on how CP manufacturers can become more proficient in pricing excellence in the short-term.
Pricing’s impact on volume, share, growth, and profitability is well established regardless of commercial nuances across industries or business models. In addition to communicating intended value positioning, pricing, unlike other elements across the marketing mix, does not require significant investments, resources or time and is arguably the most accessible marketing lever to manage profitability.
Seemingly minor adjustments, thoughtfully enacted and executed, can produce asymmetrical impact on volume, share, revenues and ultimately profitability. For illustrative purposes, consider a CP manufacturer with the following profile: Operating Profit – 10%; Variable Costs – 65%; and Fixed Costs – 25%. In this case, a 1% price increase can yield a 10% increase in operating profit compared to 6.5% and 2.5% for a 1% reduction in fixed and variable costs respectively.
Naturally, price moves work in the opposite direction as well. Dropping the price by 1% in our example reduces operating profits by 10% with all else being equal. Counting on higher sales volume to compensate for lower margins is often a fool’s errand. This is especially true for a firm operating with a lower profit structure as pricing’s effect on profitability becomes increasingly amplified.
Despite fully recognizing the influence of sound pricing fundamentals, many firms continue to struggle with effectively managing pricing let alone optimizing it. You don’t have to be in the majority – break away from the pack and operationalize your pricing process to drive top-line growth.
- Determine which strategic pricing framework is best for your products or services. I recommend Value Based Pricing because it is consumer-centric. Also, drive organizational discipline through cross-functional oversight. Pricing is too important to be managed in a vacuum by a single functional group. Brand may own the P&L but pricing should be managed as an integral aspect of your Integrated Business Planning process because of its outsized effect on your financial performance and operations.
- Develop a data strategy for pricing analytics and resource it with an enabling technology infrastructure and analytical expertise that can translate insights into meaningful strategies and tactical plans. ROI tends to be very high given pricing’s impact, so invest accordingly.
- Focus on getting the base price right through simulation and in-market testing. Understand and leverage price elasticity of demand to your advantage in the market and as fact-based selling with your demanding customers. I find that companies don’t invest enough effort in establishing and maintaining solid base pricing fundamentals. Base pricing’s foundational role means it carries a multiplier effect across promotional pricing – a shaky foundation is no place to start.
Average Selling Price (ASP)
A key objective is to increase your Average Selling Price (ASP) over time to boost net sales growth. Once your base price is effectively set, explore tactical, opportunistic ways to feather additional pricing at the micro level. Instead of across the board list price moves, strive to manage pricing with more precision across smaller sub-sets of customers, channels, and geographies. This is a dynamic, iterative process characterized by some degree of trial and error initially but will improve over time as your repository of information grows.
In today’s challenging market, effective pricing management can help CP manufacturers realize incremental net revenue growth. What is your plan on pricing?